If you’ve been looking into buying a home with a mortgage, you’ve probably heard the terms Prequalification and Preapproval tossed around quite a bit. For buyers that are new to the real estate/ home loan scene, these words might seem interchangeable. However, contrary to what you might think, there is a difference between getting Prequalified and getting Preapproved for a loan. Knowing the difference can not only give you a more informed approach to the home loan process but it can also help you make the best decision for your current situation and home-buying timeline. Read more below about being Prequalified VS Preapproved: What’s the Difference?
What is a Prequalification?
Getting a Prequalification is often one of the first steps you take when starting to search for a home. A Prequalification (often called a Prequal) is an estimate of what you might be able to borrow from a particular lender. Notice my use of the term- “might”. A prequalification is not a preapproval nor is it a commitment for a loan. It is an estimate. Think of your Prequalification as your starting point.
When getting a prequalification, you provide your lender with some basic information about your finances and a credit check. Prequalifications use a soft credit check. Soft credit checks do not impact your credit score.
What is a Prequalification Good For?
A prequalification is a really good starting point. It is an opportunity to explore different mortgage options and to compare rates among lenders. Since your credit is not impacted by the soft credit check of a prequalification, you have the luxury to shop around to find the best lender and loan for your particular situation.
Getting a Prequalification is something I recommend to clients who are just starting to explore the idea of homeownership. By sitting down with a lender, oftentimes before you even have saved up your down payment or started searching for a home, they can give you an idea of what you could be approved for with your current financial standings.
By having an idea of what your loan will look like, you can explore interest rates, lenders, down payment amounts/ options, and start getting a more clear picture of what you’ll be able to obtain.
NOTE: With a prequalification, you can start your home search confidently by knowing more about what you can likely spend. However, it is not recommended for you to submit offers with a Prequalification. For that, you should have a Preapproval.
What is a Preapproval?
A Preapproval is a step above a prequalification. It demonstrates your ability to qualify for a specific loan amount. All lenders require you to complete a formal application. The lender will verify the information you provide them with and perform a hard credit check. A hard credit check will temporarily impact your credit score. If you’re preapproved, your lender will give you a preapproval letter with the specific amount they are offering to loan to you.
Although a preapproval is more accurate and detailed than a prequalification it doesn’t mean your home loan amount is written in stone! Your preapproval letter is still just an offer from a lender stating that they will likely be able to loan you up to this amount for your home purchase.
Preapproval letters do have an expiration date. In my experience, most are good for a maximum of 6 months. However, this does vary depending on your lender! If your preapproval letter expires during your home search most lenders can draw up another one fairly quickly.
Many buyers choose to purchase a home that is below their total pre-approval amount. That is completely okay! Just because you’re approved for a maximum loan amount doesn’t mean you need to spend that amount on your purchase. Make sure you know how much you’re comfortable with spending! Check out this Affordability Calculator from Bank of America to give you a rough idea of how much you can fit into your monthly budget.
What is a Preapproval Good For?
A preapproval is the closest form of commitment that you can get from a lender for a home loan. It is vital for putting in serious offers on a home. Having a preapproval in hand when making an offer on a home shows the sellers that you are serious and financially able to secure a mortgage and make the purchase.
I recommend that any serious buyer get a preapproval before you start your home search! That way, when the right home comes along you’re ready and able to make your most competitive offer and avoid missing out on a great opportunity. Want some more tips on starting your home search? Check out our post “10 Tips for Starting Your Home Search”!
How Long Does it Take?
The amount of time it takes to get a prequalification or preapproval can vary depending on which you choose and your lender. Some lenders work faster than others and offer different options when it comes to the application process. Preapprovals tend to take longer than prequalifications due to the more detailed nature of the application process.
Most lenders that I’ve worked with can get my clients a preapproval letter in 2 to 3 days after completing the formal application which is considered pretty quick. However, it is important to note that not all lenders are able to do this.
What Info Do I Need?
Both prequalifications and preapprovals require similar information about your finances. However, the preapproval process requires much more detailed information about income. Take a look at the infographic to the right to give you a better idea of what you’re likely to need. It is important to note that while home loan applications generally ask for similar things, they are not all the same. Some lenders may ask for slightly different things. Ask your lender so you have all of the necessary documents!
So, what’s My Best Option?
If you’re a first-time homebuyer or new to the process of getting a home loan, getting prequalified before you get a preapproval might be the best option for you. This is especially true if you’re not ready to buy within a year. With a prequalification, you have the chance to compare different mortgage options, lenders, and conditions. Additionally, by talking with a lender you can get a better idea of which type of mortgage would be best for you and your budget. A prequalification is a good first step for those just starting to think of purchasing a home.
If you’re looking to purchase a home in the next 6 months, are looking at homes, and are ready to put a serious offer on a home, you should opt for a Preapproval. A preapproval letter is a necessity when putting an offer in on a home. Sellers in our current competitive market prefer to work with preapproved buyers. Preapproved buyers can make fast, competitive offers. Fast offers mean more success!
The Takeaway
There is so much mystery surrounding the process of getting a mortgage. It may seem confusing when first starting out, but taking the time to learn about the ins and outs will give you an edge when deciding what is best for your financial situation. Hopefully, this post on Prequalified VS Preapproved: What’s the Difference has helped to lift some of the confusion and give you a better idea of what would be best for you!
Thinking about getting Preapproved or Prequalified to buy a home? Contact Me or reach out via Email!
Have questions about Prequalifications or Preapprovals? Leave your thoughts in the comments below!
